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Identify ONE accounting policy that could lead to financial misstatements (deliberate or unintentional), or opportunities for...

Identify ONE accounting policy that could lead to financial misstatements (deliberate or unintentional), or opportunities for earnings management due to its application.

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Answer #1

One accounting policy that could lead to financial misstatements (deliberate or unintentional), or opportunities for earnings management due to its application is the policy with regards to “contingent liabilities”. The accounting policy for contingent liability is that it should be recorded if the contingency is likely and the amount of the liability can be reasonably estimated.

As the element of subjectivity is involved in this companies can easily mask their contingent liabilities. Deliberate or unintentional failure to record potential liabilities that are likely to occur will boost the company’s net income. This will also happen when there is a deliberate or unintentional underestimation with regards to how much they are likely to cost.

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